Let\'s Roll, Inc. currently manufactures the wheels that it uses for its in-line

Question

Let's Roll, Inc. currently manufactures the wheels that it uses for its in-line skates. The annual costs to manufacture the 151,000 wheels needed each year are as follows: Total Cost Direct material $ 175,000 Direct labor 51,000 Variable overhead 69,000 Fixed overhead 297,000 Total $ 592,000 Wheeling Company has offered to provide Let's Roll with all of its annual wheel needs for $4.00 per wheel. If Let's Roll accepts this offer, 75% of the fixed overhead above could be totally eliminated. Also, Let's Roll would be able to rent out the freed up space and could generate $79,000 of income annually.

Explanation / Answer

If company make insteed of buying the wheels Company will save $599,250-$592,000 = $7,250

Make Meterials 175000 Direct Labour 51000 Overhead Fixed 297000 Variable 69000 Total Costs 592000 Buy Purchase price 151,000*$4.00 = $604,000 Fixed Cost $297,000*25% = $74,250 Less: Additional Income -$79,000 Total Cost $604,000+$74,250-$79,000 = $599,250

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